Consumer Confidence Declines amid Price Acceleration

This morning, according to the University of Michigan, consumer sentiment was revised lower from 79.6 to 76.9 in the final February report, the lowest reading in two months and the first monthly decline since November. In the details of the report, a gauge of current conditions was revised down from 81.5 to 79.4, a two-month low, and a gauge of future expectations was revised lower from 78.4 to 75.2 in the final February print, also the lowest reading since December.

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Bottom Line: Consumer sentiment dipped for the first time in three months, likely reflecting a growing uncertainty amid higher prices. While relatively still optimistic, the average household was gaining a more positive perspective over the past year and a half as price pressures were abating from peak levels. The more recent acceleration, particularly in gas prices last month, up nearly 6% according to AAA, has consumers questioning both present and future conditions.

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Also this morning, the S&P Global U.S. Manufacturing PMI was revised higher from 51.5 to 52.2 in in the final February print, the highest reading since July 2022.

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On the other hand, this morning’s ISM report indicated a loss of momentum in manufacturing activity. The ISM Manufacturing Index unexpectedly fell from 49.1 to 47.8 in February, a two-month low and marking the 16th?consecutive month in contraction (a reading below 50). According to the median forecast, the index was expected to rise to a reading of 49.5.

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In the details of the report, backlog of orders rose 1.6 points to a reading of 46.3, and customer inventories gained from 43.7 to 45.8 in February. On the other hand, production fell two points to 48.4, new orders decreased from 52.5 to 49.2, inventories fell from 46.2 to 45.3, and prices paid declined from 52.9 to 52.5 in February, averaging 48.2 in the past six months. Additionally, employment decreased from 47.1 to 45.9 in February, a two-month low.

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Also this morning, construction spending fell 0.2% in January, the first monthly decline since December 2022. According to the median forecast, construction spending was expected to rise 0.2%. Over the past 12 months, construction spending rose 11.7%, down from the 14.4% increase in December.

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Later today, total vehicle sales are expected to rise from 15.00m to 15.40m in February.?

On the Fed-speak front, at 10:15 a.m. ET, Governor Christopher Waller and Dallas Fed President Lorie Logan will speak at the 2024 U.S. Monetary Policy Forum in New York. Later at 12:15 p.m. ET, Atlanta Fed President Raphael Bostic will speak in a moderated conversation at a real estate conference in Orlando, and at 1:30 p.m. ET, San Francisco Fed President Mary Daly will participate in a panel discussion on “AI and the Labor Market.” Finally, at 3:30 p.m. ET, Fed Governor Adriana Kugler will speak on the Fed’s dual mandate at the 2024 Standard Institute for Economic Policy and Research Economic Summit.

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Yesterday, personal income jumped 1.0% in January, surpassing the 0.4% gain expected and following a 0.3% increase in December. Consumer spending, meanwhile, increased 0.2% at the start of the year, in line with expectations and following a 0.7% gain in December. Year-over-year, consumer spending increased 4.5%, the weakest annual gain since February 2021, while personal income rose 4.8% in January following a similar rise in December.

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Adjusting for inflation, real consumer spending fell 0.1%, while real income was flat (0.0%) in January following a 0.2% increase in December. Over the past 12 months, real spending rose 2.1%, the weakest annual increase since October, while real disposable personal income gained 2.4%, the largest increase since November 2021.

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On the inflation front, the PCE rose 0.3% in January, as expected and following a 0.1% rise in December. Year-over-year, headline inflation increased 2.4%, also as expected and down from the 2.6% annual gain in December.

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Excluding food and energy, the core PCE rose 0.4% in January, as expected and the largest monthly increase in a year. Over the past 12 months, core inflation increased 2.8%, as expected and down from a 2.9% annual gain in December. January’s 2.8% increase marks the smallest annual gain since March 2021.

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Bottom Line: Yesterday’s PCE report reinforces an earlier message indicated by the January PPI and CPI reports, suggesting price pressures accelerated at the start of the year. Anxious to dismiss alternative metrics of inflation, Fed officials – and investors alike – cannot ignore the lack of improvement in the PCE.?

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Investors, first betting on a March rate cut and now May, are likely to be severely disappointed as the lack of improving inflation data will expectedly keep the Committee on the sideline for much longer than market participants expect (or would like).??

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Also yesterday, initial jobless claims rose by 13k from 202k to 215k in the week ending February 24, a three-week high. The four-week average, however, fell from 216k to 213k. Continuing claims, or the total number of Americans claiming ongoing unemployment, rose from 1.86M to 1.91M in the week ending February 17, the highest since mid-November.

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Additionally, the Chicago PMI unexpectedly fell from 46.0 to a reading of 44.0 in February, a seven-month low. According to the median forecast, the index was expected to rise to 48.0 in the second month of the year. In the details of the report, prices paid rose, signaling expansion, while new orders, employment, deliveries and order backlogs fell, signaling contraction.

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The Kansas City Fed Index rose five points to a reading of -4 in February, a two-month high, albeit the sixth consecutive month of decline. According to the median forecast, the index was expected to rise to -2 in the second month of 2024. In the details of the report, employment rose from -2 to +8, shipments gained from -20 to +6, production increased from -17 to +3, and the volume of new orders rose to a reading of -2 from -19. On the other hand, prices paid fell from +24 to +15, and the six-month outlook dropped from +11 to +2, a three-month low.

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Finally yesterday, pending home sales unexpectedly fell 4.9% in January, the largest monthly decline since August. According to the median forecast, pending home sales were expected to rise 1.5%. Over the past 12? months, pending home sales dropped 6.8%, marking the 26th consecutive month of decline.

Next week the economic calendar is relatively light beginning on Tuesday with the final print from S&P Global’s U.S. Services and Composite PMIs, followed by January factory orders and an updated look at services activity with the February ISM Services Index. The ISM Services Index is expected to fall from a reading of 53.4 to 53.0 in February.

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Later in the week, on Wednesday, weekly mortgage applications along with a few employment releases beginning with the ADP private-sector employment report and the January JOLTS report, followed by weekly jobless claims data on Thursday.

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All ahead of the key release of the week, the February nonfarm payrolls report on Friday. After a larger-than-expected gain of 353k in January, nonfarm payrolls are expected to slow to just 190k in February, potentially marking a three-month low.

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The unemployment rate, meanwhile, is expected to remain at 3.7% for the fourth consecutive month, well below what the Fed designates as the full unemployment range, and perpetuating the notion of tight labor market conditions.

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And average hourly earnings are expected to rise 0.2% in January and 4.3% over the past 12 months, down from the 4.5% gain in January. Wages continue to remain elevated, compounding pressures on businesses while offering a welcome offset to elevated prices and higher borrowing costs on the consumer side.?

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On the Fed-speak front, there are a number of Fed officials slated to take the stage throughout the week, including Philadelphia’s Patrick Harker, San Francisco Fed President Mary Daly, Cleveland Fed President Loretta Mester and New York’s Williams. Chair Powell will also deliver the semi-annual policy testimony to Congress on Wednesday and Thursday.?

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-Lindsey Piegza, Ph.D., Chief Economist